Bravo to the brave lawyers from Baker & McKenzie who admitted, before an audience of potential customers at the SIG (Sourcing Interest Group) Global Leadership Summit in Seattle, that lawyers can actually get in the way of negotiating a successful outsourcing deal. If all your legal team does is “just identify risks and say `no,’” to clauses that could maybe someday possibly cause harm, “you need to educate your lawyers or get new lawyers,” Ed Hansen, a partner at the outsourcing law firm, told the audience.
Outsourcing customers need to negotiate contracts “that let innovation happen,” rather than just cut costs, he said. And for that to happen, lawyers must help outsourcing clients focus on negotiating the right terms and conditions with outsourcers. Those twin themes – the need for better governance so outsourcers can innovate – are coming up more and more in my conversations with outsourcing customers and vendors. A white paper Baker & McKenzie released at the conference showed some interesting ways forward.
The white paper was based on a survey of 93 global organizations that showed contract negotiators typically spend the most time hammering out limitation of liability and indemnification clauses – in short, what happens if things go wrong. “Although important, these terms legislate for the results of failure; they do not in themselves reduce the probability of things going wrong in the first place,” the white paper said. It instead recommended “focusing limited time and resources on factors which unlock the most value.”
Respondents were asked what factors tend to sap value from outsourcing arrangements (see chart) and their answers point to what negotiators and their lawyers should focus on. They include being more careful defining your service levels; implementing internal change control to the outsourcer isn’t overwhelmed with unexpected work, and creating a partnership rather than an adversarial relationship with the outsourcer. As one SIG attendee said, it’s rather pointless to hit the outsourcer over the head for every extra dime during the contract negotiations, then turn around and expect them to be a “partner” in the implementation phase.
What you measure is also critical to success, and is another way smart lawyers can help craft successful deals. Several respondents said, for example, it is “common for service level agreements to be based on what is easy for the supplier to measure rather than what is most valuable to the customer.”
Customers also need to get their own house in order. One survey respondent described how, rather than paying for a “bench” of supplier personnel to be on call for ad-hoc work, the customer tried to improve their internal demand forecasting. Unfortunately, the customer couldn’t, meaning their demands for help from the outsourcer were inevitably “urgent,” leading to delays because the outsourcer hadn’t staffed up for those needs. In other words, the deal was set up to fail (or at least underperform) from the start.
Lawyers Needed Early On
Lawyers will only be an “expensive side show” if they are only used to argue over liability and indemnity provisions, the law firm said. Their talents can be better applied, they said, in the early stage of the process, helping to form the engagement strategy, identifying potential legal risks and helping to plan the timeframe and staffing for the RFP process. Once the time frame is set, lawyers can cut short the negotiations over “what-if” clauses by proposing standard terms and conditions, freeing up more time to negotiate terms “which will prevent problems in the first place such as scope, service level agreements and governance.”
Bravo to the lawyers for admitting they can do better, and challenging the rest of us to do better as well. We’d love to hear from other lawyers – or their customers – who are moving beyond what could go wrong to how they can make things better.
This article originally appeared on Global Delivery Report